Frequently, we are faced with questions from policyholders or public adjusters regarding the interpretation of insurance coverage under a policy. Usually, these questions arise when the insurance company has limited or denied coverage. While these opposing interpretations are sometimes resolved without litigation, sometimes the insured’s and insurer’s positions become intransigent, and the next step requires the assistance of the court. The interpretation of whether a policy provides coverage is a question of law.
Courts construe insurance policies as contracts, and in interpreting the policy, courts consider the insurance policy as a whole, giving the policy a fair, reasonable, and sensible construction as would be given to the contract by the average person purchasing insurance. When policy language is unambiguous, the court does not create ambiguity to find coverage. Where possible, courts will harmonize clauses that appear to conflict in order to give effect to all of the contract provisions.
So how do you get the issue before the court? In some cases, the insured will file a lawsuit for breach of contract seeking a final judgment on not only a breach but damages award. However, civil litigation takes time, and in the case of a breach of contract claim, the losing party may be exposed to the prevailing party’s attorney fees. Attorney fees awards vary by state, so be sure to ask local counsel about how attorney fees are awarded in your state.
An alternative way to resolve these controversies is through a declaratory judgment. A declaratory judgment is a legal determination by the court, which resolves legal uncertainties in a controversy. Declaratory judgment actions have been a recognized civil vehicle for more than one hundred years. Congress enacted the Uniform Declaratory Judgments Act in 1922, which was implemented by the National Conference of Commissioners on Uniform State Laws. Its goal was to harmonize laws and regulations across the states. Arizona is one of more than forty states that adopted the Uniform Declaratory Judgment Act and codified it under A.R.S. 12-1831 et. seq.
Courts of record within their respective jurisdictions shall have power to declare rights, status, and other legal relations whether or not further relief is or could be claimed. No action or proceeding shall be open to objection on the ground that a declaratory judgment or decree is prayed for. The declaration may be either affirmative or negative in form and effect; and such declarations shall have the force and effect of a final judgment or decree.
In 1934, Congress enacted the Federal Declaratory Judgment Act:
In a case of actual controversy within its jurisdiction, . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such. 28 U.S.C. § 2201(a).
A petition for a declaratory judgment asks the court to define the legal relationship between the parties and their rights with respect to the matter before the court. By seeking a declaratory judgment, the party seeking a declaratory judgment is requesting the court to make an official declaration regarding a matter in controversy. A petitioner is asking the court to define the legal relationship between the parties and their rights. A declaratory judgment is binding but is distinguished from other judgments or court opinions in that it doesn’t provide a method of enforcement.
Under both the federal and state declaratory judgment acts, the remedy provided by a declaratory judgment has been found to be proper for the determination of questions arising from the construction and operation of insurance policies regarding the rights and liabilities of the insurance company and the policyholder. Declaratory judgment actions have also been filed to determine controversies between insurance companies when two or more companies are liable under a policy.
While the declaratory judgments act has been interpreted liberally by state and federal courts, there are limitations. Some courts have found that declaratory remedy is recognized as discretionary in controversies involving insurance policies. In addition, the declaratory act requires that there is a justiciable controversy. A justiciable controversy exists if there is “an assertion of a right, status, or legal relation in which the plaintiff has a definite interest and a denial of it by the opposing party.” See e.g., Morris v. Fleming, 128 Ariz. 271, 625 P.2d 334 (App.1981). While the court may determine the rights of the parties, it will not be ordering anything be done or award damages. Thus, while the court may determine if coverage exists, the court is not ordering the insurance company to pay on the claim.
Declaratory judgments are one more tool your attorney can use to address coverage disputes. As always, check with local counsel to see how laws may vary in your state.